With India aspiring to become a developed economy by 2047, we need larger, global-scale banks to drive growth and financial inclusion. Today, only two of India’s banks figure in the list of the world’s top 100 banks. State Bank of India is ranked 43rd while HDFC Bank occupies the 73rd spot.
What is the govt’s view on creating bigger banks?
Finance Minister Nirmala Sitharaman has said the government has begun discussions with the Reserve Bank of India (RBI) and banks to create bigger banks in India. The FM believes India needs a lot of big and world-class banks. The merger of public sector banks (PSB) is one of the routes to form large banking entities, she said.
The outstanding loans of the banking system today are around Rs 180 lakh crore while deposits are Rs 200 lakh crore, both small in the global context. India’s bank credit-to-GDP ratio remains relatively low, underscoring ample room for sustained long-term credit growth. As of October 17, 2025, total credit off-take reached Rs 192.1 lakh crore while deposits stood at Rs 238.8 lakh crore.
The top four global banks are from China which has seven banks among the top 20. If India’s GDP is to increase to $30 trillion — almost a ten-fold jump from current levels — bank funding must rise to about 130% of GDP from the current 56%.
Why are bigger lenders better placed?
Larger lenders are typically better capitalised which enables them to absorb any shocks without impairing their balance sheets or their P&L accounts. Their risk and credit appetite will be bigger. As they have economies of scale, bigger banks can defray costs over bigger asset and liabilities portfolios and thereby become more cost-efficient. The cost-income ratio of PSBs is relatively high at about 52% compared with 45.9% for private banks.
If this comes down, the savings can then be passed on to customers. For instance, they could offer savers higher interest rates on deposits at a time when deposits are growing slowly. Large branch networks, formed via mergers, can help banks access customers in far-flung areas. This helps them grow their businesses faster while furthering financial inclusion. Mergers help banks leverage each other’s banking, IT and geographical strengths and complimentarities. A national presence helps them diversity risk.
How did the last round of mergers work out?
The last major consolidation was announced in August 2019 when 27 PSBs were amalgamated to form 12 state-owned lenders. The mergers have helped make the lenders more efficient by bringing down their operating expenses. In fact, PSBs have been gaining market share. For instance, PSBs grew faster than private sector banks in the June quarter and the gap in deposit growth narrowed further. Analysts noted this indicates their ability to deliver structurally higher than-system loan growth. What’s more, the outperformance came not from corporate lending but from retail segments: PSBs reported stellar growth in home loans, MSME loans, and their overall retail portfolios. While the faster growth may have come at the cost of aggressive pricing, which weighed on their net interest income, this was an intentional strategy to gain share. They reported much higher loan growth than their private sector peers.
How the govt plans to give SBI more flexibility
The appointments committee of the Cabinet has revised the guidelines for the selection of whole-time directors of PSBs, superseding all earlier norms. Under the new guidelines, private sector candidates can apply for one of the four MD positions at State Bank of India.
The government is also opening up at least one executive director position at large PSBs for the private sector. The logic of bringing in private sector talent to top jobs in PSBs is pretty simple: bring in sharper managerial talent, market discipline, and tech-savvy efficiency. Exposure to private sector practices — in risk management, digital operations, or customer engagement — can be valuable.
At a time when the government is planning more mergers to create fewer but more competitive banks, there will be a need to have more private sector professionals in leadership positions because of their specialised skills and ability to think out of the box.
Can mergers alone transform banks?
The FM observed that it’s not just about amalgamation. “We need an environment where banks can operate and grow,” she said. This suggests some regulatory changes may be brought about to help banks function more easily. There have been suggestions that the Banking Companies (Acquisition and Transfer of Undertakings) Act, which governs PSBs, be done away with, and these banks be brought under the Companies Act, like private sector banks.
This would enable the government to reduce its stake in PSBs to below 50%. While, with 49%, the government would still be the biggest owner, banks would not be under the purview of the Comptroller and Auditor General of India and the Central Vigilance Commission. Also, the majority of directors would be independent directors.
Experts say PSBs need to have flexible rules on hiring CEOs and their tenures. Compensation packages too need a re-look so that these banks can attract fresh blood and don’t lose talent to the private sector.
